Case Study of Bg Group

A. METHODOLOGIES 1. The Weighted Average greet of majuscule (WACC) entree This order offers a wide revolve of advantages. For instance, the Capital As tack togethers Pricing pretence (CAPM) is employed in the calculation of the Cost of Equity. Thus, the discounted position of 7. 58 per centum used in figure 1. 12 accompaniment is likely to be precise. The total observe of the firm is $4. 73 one million million million. Nonetheless, in view of the probabilities of forebode errors in the estimation of cash flows, the degree of preciseness does non attempt an accu prize depart.Another drawback of the approach would be the failure to surrender for the impacts of real options on tap(predicate) to management on future cash flows. Hence, this system is considered as an alternative for crosschecking. The conjectures ar the dividends grow constantly in sempiternity at 3 percent and the debt symmetry is also constant at 28. 1 percent. For move on analysis, interest ref er to item 2a and 3c in the estimation. 2. The EBIT Multiples forward motion Under this mannerology, the debt-equity ratio was not required. Thus, the survey of the firm is approximately $4. 3 billion later liquidity discount was taken into account. This yields an insignificantly unlike result comp ard to the result under the WACC method. However, since the average EBIT multiples strongly depend on the comparable companies in the industry, reliable information is less likely to be available in practice. Therefore, another approach is employed. 3. Adjusted Present appraise (APV) Approach The APV method is to a greater extent complicated than two methods mentioned earlier inasmuch as it takes account of unlevered observe of the firm and the interest tax shield.Recent complexity of the method notwithstanding, APV provides management with an pellucid valuation of interest tax shield and an assumption of constant debt-equity ratio is unnecessary. According to figure 1. 10, the total note value of the firm in advance synergies is $5. 02 billion. Nonetheless, this method ignores the monetary values of financial distress, which might lead to an overestimation of the firm with a significantly high debt ratio. 4. Conclusion Under unalike methods employed above, the range of difference bets to be unbiassed.Thus, the value of the firm sooner synergies is expected to be approximately $4. 89 billion on average. For the spirit of consistency, APV method is selected for upgrade analysis of the value of the firm both before and after(prenominal) synergies. B. financial ANALYSIS 1. Free Cash Flows (FCFs) Valuation The stick value of the cash flows is calculated based on the WACC rate and it is estimated at $1. 28 billion. The rate is used by reason of the assumption of incompatible components, for instance speak to of equity and cost of debt. For further information of the assumption, please refer to the Appraisal. . end point cherishs and Long-term Gr owth The terminal value before synergies is $3. 45 billion whereas this amount after synergies is $8. 36 billion. In details, the synergies revenues and the backhaul synergies savings are the major contributors to the significant difference. Additionally, the terminal value re yields the grocery value of turn cash flows from AirThread Connections at all future dates. This, thereby, lends the analyst the plausibility to guess that the discounted rate is decent to the WACC rate of 7. 58 percent.Lastly, to be conservative, that is, in the whisk scenario, the figure of growth rate obtained in the Appraisal is around 3. 0 percent. 3. Non-operating Investment in Equity Affiliates This amount of $1. 72 billion is extend to to Equity in Earnings of Affiliates times the diachronic P/E multiple for the industry at 19. 1. These investments are precious under the trade multiple approach because a thorough delinquent diligence is not possible to be conducted. 4. Value of Operating Asse ts This value is equivalent to the present value of the hindquarters partnership on a going equal basis.It is estimated at $5. 02 billion before the synergies and at $10. 38 billion after the synergies. However, since the value of non-operating assets is not taken into account, the total value of the target company is not fully reflected. 5. endeavor Value The Enterprise value is equal to the sum of the value of operating assets and the value of nonoperating assets. i. forward Synergies In this case, the synergies related to business revenues and the backhaul synergies savings are not considered. The FCFs ppear to be more immaterial accordingly. It, therefore, leads to a lower Intermediate Term Value of $1. 57 billion and a lower Enterprise Value of $6. 74 billion. ii. After Synergies With the outcome of synergies, the FCFs and, thus, the Enterprise Value of $12. 1 billion appear to be more material. Importantly, the significant difference is contributed by the cost-saving ef ficiency in backhaul costs and the network utilization. Thus, more advantages would occur. Firstly, administrative expenses such as auditing fees are reduced.Secondly, the market deal out leave alone, in essence, increase and monopoly gains due to large regional client bases from the target company could be expected. The company result be able to set a higher price and to increase a sheer flock of sales. Also, the company will gain more personality and the cost of capital letter will be lower accordingly. Lastly, due to its radical size, the company will have more bargain power and the relationships with banking entities will be better. Consequently, the cost of borrowing tends to decrease.Case Study of Bg GroupA. METHODOLOGIES 1. The Weighted Average Cost of Capital (WACC) Approach This method offers a wide range of advantages. For instance, the Capital Assets Pricing Model (CAPM) is employed in the calculation of the Cost of Equity. Thus, the discounted rate of 7. 58 perce nt used in figure 1. 12 Appendix is likely to be precise. The total value of the firm is $4. 73 billion. Nonetheless, in view of the probabilities of forecasting errors in the estimation of cash flows, the degree of precision does not guarantee an accurate result.Another drawback of the approach would be the failure to allow for the impacts of real options available to management on future cash flows. Hence, this method is considered as an alternative for crosschecking. The assumptions are the dividends grow constantly in perpetuity at 3 percent and the debt ratio is also constant at 28. 1 percent. For further analysis, please refer to item 2a and 3c in the Appraisal. 2. The EBIT Multiples Approach Under this methodology, the debt-equity ratio was not required. Thus, the value of the firm is approximately $4. 3 billion after liquidity discount was taken into account. This yields an insignificantly different result compared to the result under the WACC method. However, since the aver age EBIT multiples strongly depend on the comparable companies in the industry, reliable information is less likely to be available in practice. Therefore, another approach is employed. 3. Adjusted Present Value (APV) Approach The APV method is more complicated than two methods mentioned earlier inasmuch as it takes account of unlevered value of the firm and the interest tax shield.Recent complexity of the method notwithstanding, APV provides management with an explicit valuation of interest tax shield and an assumption of constant debt-equity ratio is unnecessary. According to figure 1. 10, the total value of the firm before synergies is $5. 02 billion. Nonetheless, this method ignores the costs of financial distress, which might lead to an overvaluation of the firm with a significantly high debt ratio. 4. Conclusion Under different methods employed above, the range of difference appears to be immaterial.Thus, the value of the firm before synergies is expected to be approximately $ 4. 89 billion on average. For the purpose of consistency, APV method is selected for further analysis of the value of the firm both before and after synergies. B. FINANCIAL ANALYSIS 1. Free Cash Flows (FCFs) Valuation The present value of the cash flows is calculated based on the WACC rate and it is estimated at $1. 28 billion. The rate is used by reason of the assumption of different components, for instance cost of equity and cost of debt. For further information of the assumption, please refer to the Appraisal. . Terminal Values and Long-term Growth The terminal value before synergies is $3. 45 billion whereas this amount after synergies is $8. 36 billion. In details, the synergies revenues and the backhaul synergies savings are the major contributors to the significant difference. Additionally, the terminal value represents the market value of free cash flows from AirThread Connections at all future dates. This, thereby, lends the analyst the plausibility to believe that the dis counted rate is equal to the WACC rate of 7. 58 percent.Lastly, to be conservative, that is, in the worst scenario, the figure of growth rate obtained in the Appraisal is around 3. 0 percent. 3. Non-operating Investment in Equity Affiliates This amount of $1. 72 billion is equal to Equity in Earnings of Affiliates times the historic P/E multiple for the industry at 19. 1. These investments are valued under the market multiple approach because a thorough due diligence is not possible to be conducted. 4. Value of Operating Assets This value is equivalent to the present value of the target company on a going concern basis.It is estimated at $5. 02 billion before the synergies and at $10. 38 billion after the synergies. However, since the value of non-operating assets is not taken into account, the total value of the target company is not fully reflected. 5. Enterprise Value The Enterprise value is equal to the sum of the value of operating assets and the value of nonoperating assets. i . Before Synergies In this case, the synergies related business revenues and the backhaul synergies savings are not considered. The FCFs ppear to be more immaterial accordingly. It, therefore, leads to a lower Intermediate Term Value of $1. 57 billion and a lower Enterprise Value of $6. 74 billion. ii. After Synergies With the effect of synergies, the FCFs and, thus, the Enterprise Value of $12. 1 billion appear to be more material. Importantly, the significant difference is contributed by the cost-saving efficiency in backhaul costs and the network utilization. Thus, more advantages would occur. Firstly, administrative expenses such as auditing fees are reduced.Secondly, the market share will, in essence, increase and monopoly gains due to large regional client bases from the target company could be expected. The company will be able to set a higher price and to increase a sheer volume of sales. Also, the company will gain more reputation and the cost of capital will be lower accor dingly. Lastly, due to its new size, the company will have more bargain power and the relationships with banking entities will be better. Consequently, the cost of borrowing tends to decrease.